| Updated: October 30, 2024Profile of United States dollar – major economic reports
This lesson will cover the following
- Non-farm Payrolls, CPI, PPI
- Trade Balance, ISM Non-manufacturing, ISM Manufacturing
- Michigan Confidence, Retail Sales, Industrial Production
Major economic reports, released by the United States
Non-farm Payrolls
Non-farm Payrolls (NFP) is the most important and largely tracked piece of data released in the US jobs report. The figure reflects the change in non-farm payrolls, compared to the previous month. A rise in the number means that US employers created more jobs in the respective month compared to the previous one and vice versa. Creation of jobs is considered of utmost importance for consumer spending, while the latter is a major driving force behind economic growth. The report presents the total number of US employees in any business, excluding the following four groups:
– farm employees
– general government employees
– employees of nonprofit organizations
– private household employees
The monthly NFP report presents data from two different surveys, the Establishment Survey and the Household Survey. The Establishment Survey takes data from non-farm payroll employment, average hourly workweek, and the aggregate hours index. The Household Survey provides information on the labor force, household employment and the unemployment rate.
The NFP reading released most often varies between + 10 000 and as much as + 250 000 at times when the US economy is developing well. Despite the volatility and the possibility for large revisions, the non-farm payrolls indicator is the most timely and comprehensive reflection of the current state of economy. Total non-farm payrolls account for 80% of the workers, who produce the entire Gross Domestic Product of the United States. A positive change in the non-farm payrolls, especially if it exceeds the median estimate of experts, usually provides a strong support to US dollar. Forex traders usually take into account seasonally adjusted monthly rates of unemployment and any impressive changes in non-farm payrolls.
Consumer Price Index (CPI)
The index of consumer prices is based on a basket of goods and services bought and used by consumers on a daily basis. In the United States the Bureau of Labor Statistics (BLS) surveys the prices of 80 000 consumer items in order to calculate the index. The latter reflects prices of commonly purchased items by primarily urban households, which represent about 87% of the US population. The Bureau processes price data from 23 000 retail and service businesses.
Another reported indicator is the core CPI, which does not include food and energy prices. It will usually be presented as a seasonally adjusted figure, because consumer patterns are widely variable depending on the time of the year. The Core CPI is an important measure, because this is the gauge, which the Federal Reserve Bank examines in order to adjust its monetary policy. The Fed uses the core CPI, because prices of food, oil and gas are highly volatile while central bank’s tools are slow-acting.
The CPI has a predictive value. Its readings can be interpret in different ways, depending on economic context. In case we have a sluggish economy and the annualized core CPI accelerates more than projected during a given period, approaching the inflation target set by the Federal Reserve, this may be considered as a signal that economic recovery is probably picking up the pace, thus, traders would tend to support the US dollar.
In case we have a sluggish economy and the annualized core CPI rises at a lesser-than-projected pace during a given period, this may be considered as a signal that inflationary pressure remains weak and accommodative monetary policy is still needed in order to spur economic growth, thus, traders would tend to sell the US dollar.
Within a booming economy quite high rates of inflation, well above Fed’s inflation objective, which provides price stability, can cause adverse effects to economic health.
Producer Price Index (PPI)
The index of producer prices reflects the change in prices of over 8 000 products, sold by manufacturers during the respective period. The PPI differs from the CPI, which measures the change in prices from consumer’s perspective, due to subsidies, taxes and distribution costs of different types of manufacturers in the country. In case producers are forced to pay more for goods and services, they are more likely to pass these higher costs to the end consumer. Therefore, the PPI is considered as a leading indicator of consumer inflation. The Federal Reserve also studies this report intently in order to clarify future policy moves, which might be needed to manage inflation.
The PPI reveals trends within the wholesale markets, manufacturing industries and commodities markets. All of the physical goods-producing industries, which comprise the economy are included, with the exception of imports.
Another reported indicator is the core PPI. It is of greatest importance to investors, as it represents the finished goods PPI index minus the volatile food and energy components. The PPI is meant to reflect only the prices that are being paid during the survey month. It is usual companies that do regular business with large customers to have long-term contract rates, which may be known at present, but not paid until a future date. The PPI excludes future values or contract rates. The report on PPI is released during the second or the third week of each month by the Bureau of Labor Statistics (BLS).
Trade Balance
The trade balance, as an indicator, measures the difference in value between country’s exported and imported goods and services during the reported period. It reflects the net export of goods and services, or one of the components to form country’s Gross Domestic Product. Market players tend to give higher priority to seasonally-adjusted figures, reported during a period of three months, because one-month trade periods are considered to be not very reliable. A contracting trade deficit or expanding trade surplus will usually provide support to demand for the dollar.
ISM Non-manufacturing
The Non-manufacturing Purchasing Managers Index (PMI) is a compound index, based on the values of four equally-weighted components, that comprise it. These sub-indexes reflect seasonally adjusted new orders, seasonally adjusted employment, seasonally adjusted business activity and supplier deliveries. The business report is based on data compiled from monthly replies to questions asked of over 370 purchasing and supply executives operating in over 62 different industries, which represent nine divisions from the Standard Industrial Classification (SIC) categories.
Participants can either respond with “better”, “same”, or “worse” to the questions about the industry, in which they operate. The resulting PMI value is measured from 0 to 100. If the index shows a value of 100.0, this means that 100% of the respondents reported an improvement in conditions. If the index shows a value of 0, this means that 100% or the respondents reported a deterioration in conditions. If 100% of the respondents saw no change in conditions, then the index will show a reading of 50.0. Therefore, readings above the key level of 50.0 are indicative of expanding activity in the sector of services, which is dollar positive. The Institute for Supply Management (ISM) publishes this indicator for the United States.
ISM Manufacturing
The Manufacturing Purchasing Managers Index (PMI) is a compound index, which represents manufacturing activity in 20 different industries. It is comprised by four equally-weighted components: seasonally adjusted employment, seasonally adjusted production inventories, seasonally adjusted new orders and supplier deliveries. The index is based on a survey of 300 purchasing managers.
Participants can either respond with “better”, “same”, or “worse” to the questions about the industry, in which they operate. The resulting PMI value is measured from 0 to 100. If the index shows a value of 100.0, this means that 100% of the respondents reported an improvement in conditions. If the index shows a value of 0, this means that 100% or the respondents reported a deterioration in conditions. If 100% of the respondents saw no change in conditions, the index will show a reading of 50.0. Therefore, readings above the key level of 50.0 are indicative of expanding activity in the sector of manufacturing, which usually supports the US dollar. The Institute for Supply Management (ISM) publishes this indicator for the United States.
Federal Reserve minutes
The Federal Reserve Bank publishes the minutes from its latest meeting on monetary policy three weeks after the meeting itself. The minutes offer detailed insights on FOMC’s monetary policy stance. This release is closely examined by traders, as it may provide clues over interest rate decisions in the future.
Michigan confidence
The monthly survey by Thomson Reuters and the University of Michigan shows how consumer confidence in the United States develops. The index of consumer confidence, based on the survey, has two values announced – a preliminary and a final value. The preliminary reading usually comes out two weeks ahead of the final data. The survey encompasses about 500 respondents throughout the country, while the index is comprised by two major components, a gauge of current conditions and a gauge of expectations. The current conditions index is based on the answers to two standard questions, while the index of expectations is based on three standard questions. All five questions have an equal weight in determining the value of the overall index. Higher consumer confidence implies higher consumer spending, while higher consumer spending can be viewed as a cause of accelerated rate of consumer inflation. Respectively, a higher reading of the index, especially if it surpasses median forecasts, usually boosts demand for the US dollar.
Retail Sales
The report on retail sales reflects the dollar value of merchandise sold within the retail trade by taking a sampling of companies, operating in the sector of selling physical end products to consumers. The retail sales report encompasses both fixed point-of-sale businesses and non-store retailers, such as mail catalogs and vending machines. US Census Bureau, which is a part of the Department of Commerce surveys about 5 000 companies of all sizes, from huge retailers such as Wal-Mart to independent small family firms.
Core retail sales (retail sales ex autos) is another reported indicator, which removes large ticket prices and historical seasonality of automobile sales.
The retail sales index is considered as a coincident indicator, therefore, it reflects the current state of the economy. It is also considered a pre-inflationary indicator, which investors can use in order to reassess the probability of an interest rate hike or cut by the Federal Reserve Bank. In addition, this indicator provides key information regarding consumer spending trends. Consumer expenditures, on the other hand, account for almost two-thirds of nation’s total Gross Domestic Product. Therefore, a larger than expected increase in retail sales usually supports demand for the US dollar.
Industrial Production
The index of industrial production reflects the change in overall inflation-adjusted value of output in sectors such as manufacturing, mining and utilities in the United States. The index is sensitive to consumer demand and interest rates. As such, industrial production becomes an important tool for future GDP and economic performance forecasts. Those figures are also used to measure inflation by central banks as high levels of industrial production may lead to uncontrolled levels of consumption and rapid inflation. It is a coincident indicator, which means that changes in its levels generally echo similar shifts in overall economic activity. Any increase in the index usually boosts demand for the US dollar.